About this Summary

Ndax Canada Inc. (“Ndax”, “we” and “our)  believes that our users should understand the crypto assets that they are able to trade and stake using our crypto asset trading platform (the “Platform”). One of the crypto assets we offer on the Platform is XLM. We created this summary to help you understand the basics of XLM as well as some of the risks involved in trading in XLM. While we tried to describe the key features of XLM, this summary isn’t meant to tell you everything you’d want to know before investing in XLM. You should also do your own research on XLM to make sure you are comfortable investing in it.

Description of XLM

History of XLM

Stellar is a blockchain-based payments network, built with the vision of connecting traditional and decentralized financial systems from around the world.

Jed McCaleb—MtGox’s founder and Ripple’s co-founder —introduced the Stellar project in 2014 with Joyce Kim, a former lawyer. The Stellar Development Foundation (SDF), a non-profit organization, was established in July 2014, with Stripe CEO Patrick Collison, as a collaborator. Before Stellar’s official launch in 2015, McCaleb sought alpha testers through his ‘Secret Bitcoin Project’ website.

Stripe led Stellar’s seed funding round, investing $3 million. Out of the initial release of 100 billion Lumens (then called stellar), 25% was allotted for the ecosystem’s contemporary non-profit contributors. In 2017, the SDF founded Lightyear—Stellar’s commercial wing and announced a $2 million (in Lumens) grant. As a part of the Stellar Partnership Grant Program, the award was meant to incentivize Stellar-based project development.

What is XLM used for

Initially, the XLM token was “intended solely” for the network’s internal transactions, primarily as a security mechanism. While Stellar account holders have to maintain a minimum balance of 1 Lumen, every transaction costs a minimal fee in XLM. The amount is insignificant from the perspective of overhead end-user cost but is an adequate deterrent to large-scale, malicious activities.

However, Lumen’s usability has diversified over time, and it’s now usable for transactional purposes outside the Stellar network. XLM holders can use their tokens for global payments and transfers, as well as for trading of centralized and decentralized crypto-exchanges. Especially, the minimal fee makes XLM a preferable asset for making micro and cross-border transactions.

Lumens can also be leveraged as the intermediary asset for conversions between otherwise illiquid assets and between fiat.

How XLM works

Lumens are secured using the underlying blockchain’s Stellar Consensus Protocol (SCP), a Byzantine Fault Tolerant (BFT) alternative to Proof-of-Work (PoW). The underlying concept is known as the Federated Byzantine Agreement and was conceived before Bitcoin’s release.

Apart from incentivizing the network to use standard software for optimum interoperability, Lumen-based transactions do not involve mining. Instead, a transaction is considered valid if it achieves the predefined quorum of votes from the network’s validator nodes (Basic or Full).

Risks

Before entering into an agreement (a “Crypto Contract”) with Ndax to buy or sell any crypto assets through the Platform, it is important to understand the risks. This overview is a starting point for you to perform your own research prior to investing in a crypto asset.

Like other crypto assets, there are some general risks associated with investing in XLM. Each of these risks is described in more detail in the Risk Statement provided to you at the time that you open your account with us and is also available online on the Ndax website and app. You should review the Risk Statement.

In addition to the general risks set out in the Risk Statement, we also point out other specific risks to XLM below.

Loss of Validators

The Stellar Consensus Protocol does not offer rewards to the individuals who help achieve consensus. Energy is consumed to run nodes and validate the system, so without financial incentives, there is no guarantee that individuals will continue to act as validators. This characteristic may cause the Stellar Network to eventually slow or experience delays. In May 2019, the Stellar Network went offline for approximately two hours, and, in April 2021, some transactions failed after approximately half the nodes went offline.  

Potential for Centralization

In 2020, the Stellar Development Foundation held more than half of all XLM, causing some to question whether the project was truly decentralized. Although a distribution plan was announced to eventually reduce their control, the Stellar Development Foundation has previously exerted its influence over the supply of XLM. In April 2017, it burned roughly 2 billion XLM after discovering an inflationary bug, and, in November 2019, it burned another 50 billion XLM.

While we tried to describe the key risks associated with XLM here and in our Risk Statement, we emphasize that this Crypto Asset Statement is not exhaustive of all of the risks associated with trading in XLM. You should also do your own research on XLM to make sure you are comfortable investing in such a crypto asset.

Regulatory Information  

Ndax is offering Crypto Contracts in accordance with the terms of a pre-registration undertaking dated March 23, 2023, that we entered into with the Canadian securities regulators, while our application for registration in certain Canadian jurisdictions is reviewed. Please note that Ndax is not currently registered under securities or derivatives legislation of Canada and there is no guarantee that registration will be granted.

The statutory rights of action for damages and the right of rescission in the securities legislation of each province and territory of Canada would not apply in respect of a misrepresentation in this Crypto Asset Statement.

Prior to offering a Crypto Contract on XLM, Ndax assesses whether XLM is a security and/or a derivative under the securities and derivatives laws of Canada. Ndax’s assessment includes a review of the history of the XLM (such as how it was created and its governance structure), its characteristics, its market capitalization, and any regulatory concerns regarding XLM. Based on its assessment, Ndax concluded that XLM is not a security or a derivative. However, there is a risk that this conclusion could change in the future. In that case, Ndax may be required to halt or withdraw XLM from trading on the Platform and stop any future trading of Crypto Contracts based on XLM, and users holding XLM may be required to liquidate their positions, potentially at a significant loss. In this event, users holding positions in XLM will be notified via the Platform or other electronic means and advised of the options available to them and any applicable period to sell or withdraw their positions in XLM.

No Canadian securities regulatory authority has expressed an opinion about XLM, including an opinion that XLM is not itself a security and/or derivative.